Infectious Greed
How deceit and risk corrupted the financial markets
By Frank Partnoy
Times Books
HC, 464 pgs. US$27.50/C$41.95
ISBN: 0-8050-7267-5
The world's biggest shell game
By Steven Martinovich
web posted May 5, 2003
The opening lines in the stories of companies like Enron, Global
Crossing, WorldCom and dozens of others all begin with the
same name, writes Frank Partnoy. In 1984, Sanskrit scholar
turned Wharton graduate Andy Krieger began trading currency
options at Salomon Brothers. Although his career ended in
ignominy just a few short years later, Krieger was the "Patient
Zero" in the virus that infected Wall Street and financial markets
around the world. The infection was a cavalier disregard for
everything except meeting or exceeding profit expectations and
the end of the year bonus, Wall Street's ultimate measuring stick.
It's this world that Partnoy investigates in Infectious Greed: How
deceit and risk corrupted the financial markets, a chronicle of
how the seeds for the corporate failures grew over time. Partnoy
argues that Wall Street developed increasingly sophisticated
financial instruments, nearly all based on derivatives, to allow
corporations to hide their blemishes and avoid government
regulations that would have been triggered by more traditional
financial instruments. When combined with accounting fraud,
conflicts of interest, a lack of diligence by everyone and Alan
Greenspan's "irrational exuberance," the result was a financial
world that began to spin out of control.
"In just a few years, regulators had lost what limited control they
had over market intermediaries, market intermediaries had lost
what limited control over corporate managers, and corporate
managers had lost what limited control they had over employees.
This loss-of-control daisy chain had led to exponential risk-
taking at many companies, largely hidden from public view.
Simply put, the appearance of control in financial markets was a
fiction," writes Partnoy.
Infectious Greed is part-investigative report, part-economics
lesson presented in a readable manner that takes the reader
along on a ride of irrational greed built on a foundation of fraud
and duplicity. Partnoy manages to translate the most complicated
schemes into easily understood ideas in his engaging story. All of
the era's major figures come to life in his narrative and while he's
clearly disgusted with many of their actions he also manages to
be fair to them when it's called for. As he points out, many of the
activities they engaged in were arguably immoral and unethical,
but many times it was hard to argue that they were clearly illegal.
Money, like water, likes to take the route of less resistance and
many of the complicated financial schemes used to play the
massive shell games of the 1990s were designed to avoid
regulated activities. Plainly put, they charted new courses that
often weren't covered by existing laws. It doesn't excuse some of
the reprehensible things people did, but it does certainly explain
why they happened.
Most people would like to forget the implosion of the stock
markets and the resulting hangover but Partnoy argues that this
story is far from over. The increasing complexity of derivative-
based financial instruments shows no signs of slowing and that
leaves the world economy in a dangerous position. Whether
supervised or not, a single trader is capable of significant impacts
on the market, as Krieger did when he shorted roughly the entire
money supply of New Zealand in one infamous episode.
Whether his prescription for alleviating the problems these new
instruments have solved are realistic will be for the reader to
decide but his final point is beyond debate: many of us played a
role in creating the problem and it will be up to us to hold
ourselves and the corporate world to a higher standard in the
future.
Steven Martinovich is a freelance writer in Sudbury, Ontario.
Enter Stage Right -- http://www.enterstageright.com